Executive Summary
Since 2007 the world has seen a period of considerable economic and financial volatility, during which gold has performed strongly with its price more than doubling. This performance has prompted some reappraisal of gold?s properties as an investment vehicle.
Over the very long-term gold tends to hold its value in real terms, but short-run factors can move gold away from its long run equilibrium for extended periods. These factors include financial stress, political turmoil, real interest rates, inflation, central bank activity and the US dollar exchange rate.
Using the estimated equation and Oxford Economics‟ Global Model, we examine the performance of gold relative to other assets from 2011-2015 over a number of variant economic scenarios. We find that while other assets outperform gold in the baseline scenario, gold performs relatively strongly in a high inflation scenario and also does comparatively well in a deflation scenario derived from a wave of defaults in the ?peripheral? eurozone countries. This is because such a deflation scenario includes a sharp rise in financial stress.
The scenario analysis confirms gold?s properties as a hedge against extreme events; properties that may be especially valuable given the considerable uncertainties still facing the world economy.
We find that because of its lack of correlation with other financial assets, gold has a useful role to play in stabilising the value of a portfolio even if the conservative assumption of a modest negative real annual return is made.
